Estimating the permanent income elasticity of government expenditures: Evidence on Wagner's law based on oil price shocks

Markus Brückner, Alberto Chong, Mark Gradstein

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15 Scopus citations

Abstract

This paper provides instrumental variable estimates of the permanent income elasticity of government expenditures. It uses annual variation in the international oil price weighted with countries' average oil net-export GDP shares as a plausibly exogenous source of within-country variation in countries' permanent income. The short-run estimates of the permanent income elasticity are robust across alternative specifications and are below one: the estimated elasticity coefficients range between 0.3 and 0.6 and have standard errors of 0.1 and 0.4, respectively. Point estimates of long-run elasticities are somewhat larger but still smaller than unity. The investment component of government spending is found to be more elastic than the consumption component, whereas elasticity differences between rich and poor countries are insignificant.

Original languageEnglish
Pages (from-to)1025-1035
Number of pages11
JournalJournal of Public Economics
Volume96
Issue number11-12
DOIs
StatePublished - 1 Dec 2012

Keywords

  • Permanent income elasticity of government spending
  • Wagner law

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